### A Formula for Confusion

Monday, January 23rd, 2012Thanks to an active lobby in Congress, commercial landlords have historically enjoyed a number of lease protections under the Bankruptcy Code. Even so, those same landlords nevertheless face limits on the damages they can assert whenever a tenant elects to reject a commercial lease.

Section 502(b)(6) limits landlords’ lease rejection claims pursuant to a statutory formula, calculated as “the [non-accelerated] rent reserved by [the] lease . . . for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease . . . .”

This complicated and somewhat ambiguous language leaves some question as to whether or not the phrase “rent reserved for . . . 15 percent . . . of the remaining term of such lease” is a reference to time or to money: That is, does the specified 15 percent refer to the “*rent reserved*?” Or to the “*remaining term*?”

Many courts apply the formula with respect to the “rent reserved.” *See. e.g., In re USinternetworking, Inc.*, 291 B.R. 378, 380 (Bankr.D.Md.2003) (citing *In re Today’s Woman of Florida, Inc.*, 195 B.R. 506 (Bankr.M.D.Fl.1996); *In re Gantos*, 176 B.R. 793 (Bankr.W.D.Mich.1995); *In re Financial News Network, Inc.*, 149 B.R. 348 (Bankr.S.D.N.Y.1993); *In re Communicall Cent., Inc.*, 106 B.R. 540 (Bankr.N.D.Ill.1989); *In re McLean Enter., Inc.*, 105 B.R. 928 (Bank.W.D.Mo.1989)). These courts calculate the amount of rent due over the remaining term of the lease and multiply that amount times 15%.

Other courts calculate lease rejection damages based on 15% of the “remaining term” of the lease. *See, e.g., In re Iron–Oak Supply Corp.*, 169 B.R. 414, 419 n. 8 (Bankr.E.D.Cal.1994); *In re Allegheny Intern., Inc.*, 145 B.R. 823 (W.D.Pa.1992); *In re PPI Enterprises, Inc.*, 324 F.3d 197, 207 (3rd Cir.2003).

For more mathematically-minded readers, the differently-applied formulas appear as follows:

Rent-Based Formula: | Maximum Rejection Damages = (Rent x Remaining Term) x 0.15 |

Term-Based Formula: | Maximum Rejection Damages = Rent x (Remaining Term x 0.15) |

Earlier this month, a Colorado bankruptcy judge, addressing the issue for the first time in that state, sided with those courts who read the statutory 15% in terms of time:

“In practice, by reading the 15% limitation consistently with the remainder of § 502(b)(6)(A) as a reference to a period of time, any lease with a remaining term of 80 months or less is subject to a cap of one year of rent [i.e.,15% of 80 months equals 12 months] and any lease with a remaining term of 240 months or more will be subject to a cap of three years rent [i.e., 15% of 240 months equals 36 months]. Those in between are capped at the rent due for 15% of the remaining lease term.”

*In re Shane Co.*, 2012 WL 12700 (Bkrtcy. D.Colo., January 4, 2012).

The decision also addresses a related question: To what “rent” should the formula apply – the contractual rent applicable for the term? Or the unpaid rent remaining after the landlord has mitigated its damages? Under the statute, “rents reserved” refers to contractual rents, and not to those remaining unpaid after the landlord has found a new tenant or otherwise mitigated.

Colorado Bankruptcy Judge Tallman’s decision, which cites a number of earlier cases on both sides of the formula, is available **here**.